Short-Term Buying Spree in Gold

By: Przemyslaw Radomski, CFA | Fri, Feb 4, 2011
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This essay is based on the Premium Update posted on February 4th, 2011


 

Political and social unrest in the Middle East was the most discussed topic during the week. Restlessness and riots could inflate food prices in the region and worsen the economic balance further. As a result, equity, currency and commodity markets have experienced fluctuations. The political disturbances have impacted the crude oil trade significantly as Egypt is a crucial link for oil and gas headed to Europe, Asia and the United States. There are large black swans paddling in the Middle East pond that could have a significant effect on precious metals, oil and stock markets.

On the other side of the globe, the Chinese are celebrating their New Year, the Year of the Rabbit. This year China pulled a rabbit out of the hat and China's gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese New Year. This means that China is on track to overtake India as the world's largest consumer of the yellow metal. Traders say China will overtake India as the largest consumer of gold this year. The Indian festival of Diwali was once the key driver of seasonal demand patterns because of the large number of weddings taking place during the holidays. But Now Chinese New Year is starting to have a bigger impact.

The growth in demand is being attributed in part to Chinese families giving each other gifts of gold instead of traditional red envelopes filled with cash. Fears of inflation have also driven demand for gold. So if you have a (very good) friend in China you might consider buying them a gift of a small 100 ounce bar elaborately engraved with auspicious rabbit idioms or scenes of rabbits at play, or perhaps a 20-ounce carved rabbit bar.

As per the current fundamentals influencing gold price movement, the long-term suggestion would be a definite 'buy'. To get an insight of current market sentiment, it is a better practice to account technical analysis separately. To see if we can pull a rabbit out of a hat and tell you how gold will perform in the near future let's begin this week's technical part with the analysis of the Euro Index. We will start with the short-term chart (charts courtesy by http://stockcharts.com)

$XEU Index

In the short-term Euro Index chart this week, we see a number of bearish signals, which will likely lead to a bullish sentiment for the USD Index as will be seen on the following chart. Here, we have originally seen that perhaps the right shoulder of the bearish head-and-shoulders formation has been invalidated at the beginning of this week. However, the price moved quickly below the rising dashed line, thus invalidating the insignificant breakout. Consequently, the head-and-shoulders formation is still forming.

This is of course a bearish signal going forward for the euro and of course will lead to a bullish sentiment for the USD Index as well as possibly for gold, silver and mining stocks. Of course the general stock market may also influence the precious metals sector to a great extent.

$USD Index

Our USD Index chart shows the close proximity at present to the long-term support level. This level has actually been touched and the index has once again begun to move higher. Based on this factor alone, a bounce would be likely, and we have another strong factor in favor of higher USD values - the cyclical turning points. The local bottom at the cyclical turning point is not likely to have any negative impact on gold, silver and mining stocks; there could, in fact, be a positive impact.

Although it is often believed that rising dollar is bearish news for gold, silver, and mining stocks, that was not the case during the past several months. The USD Index was leading precious metals, and now appears to be trending in tune with them.

Details, along with the cyclical turning points for the dollar, are visible on the chart below.

$USD Index

A closer look at the above chart shows that at least a local bottom has been reached precisely as indicated earlier - at the cyclical turning point. Please note that the RSI indicator is also suggesting higher values of the index in the short run, as it reached the 30 level, which we view as a buy signal.

The technical situation in these two currency indices is particularly interesting, as the USD Index is likely to rally, which would cause the head-and-shoulders formation in euro to be completed. That would be likely cause a decline in Euro and further upswings in the USD Index.

Consequently, gold has been led by the price action of the dollar in recent weeks but now appear to be moving in tune with the trends seen in the USD Index. Of course, all this bullish sentiment is paired with just the opposite, a strong bearish outlook for the euro.

However, the question remains, if the current rally can be anything more than just a quick move up. The chart below suggests that it's not out of the question.

SP Gold Bottom Indicator

We featured the SP Gold Bottom Indicator on as another measure for the technical analysis over a week ago, when we wrote the following:

Finally, we have just seen a long-term buy signal from our SP Gold Bottom Indicator.

Previously we have seen it at the end of July 2010, right before the over-$200 rally, and before that we have seen it on May 21st, 2010 (another local bottom) Dec 9th, 2009 (insignificant bottom, however prices still moved briefly above it before the decline was over), and April 9th, 2009 (almost precisely at the bottom).

As you may see, we don't get this signal very often, but when we do, it's worth taking it into account. The implications here are - of course - bullish.

The reason we mention this indicator today is that this signal means gain not only in the short run. Please take a look below for details (the blue line in the middle of the chart):

SP Indicators - Signals

Taking other factors into account it is doubtful that the rally will be a straight line up, but the point is that this signal surely supports a rally from the current levels.

Summing up, the sentiment for gold here is clearly bullish for the short-term and while the medium-term situation remains mixed, please note that - also based on the last two charts featured in this essay - at this point being out of the market with one's long-term capital is not advised.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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